PG&E 2010 Annual Report Download - page 104

ValuationAssumptions
The following actuarial assumptions were used in determining the projected benefit obligations and the net periodic cost.
The following weighted average year-end assumptions were used in determining the plans’ projected benefit obligations
and net benefit cost.
Pension Benefits Other Benefits
December 31, December 31,
2010 2009 2008 2010 2009 2008
Discount rate 5.42% 5.97% 6.31% 5.11–5.56% 5.66–6.09% 5.85–6.33%
Average rate of future compensation increases 5.00% 5.00% 5.00% –––
Expected return on plan assets 6.60% 6.80% 7.30% 5.20–6.60% 5.80–6.90% 7.00–7.30%
The assumed health care cost trend rate as of
December 31, 2010 is 8%, decreasing gradually to an
ultimate trend rate in 2018 and beyond of approximately
5%. A one-percentage-point change in assumed health
care cost trend rate would have the following effects:
(in millions) One-Percentage- Point Increase One-Percentage- Point Decrease
Effect on postretirement
benefit obligation $ 83 $ (86)
Effect on service and interest
cost 7 (7)
Expected rates of return on plan assets were developed
by determining projected stock and bond returns and then
applying these returns to the target asset allocations of the
employee benefit plan trusts, resulting in a weighted
average rate of return on plan assets. Returns on fixed-
income debt investments were projected based on real
maturity and credit spreads added to a long-term inflation
rate. Returns on equity investments were estimated based
on estimates of dividend yield and real earnings growth
added to a long-term inflation rate. For the pension plan,
the assumed return of 6.6% compares to a ten-year actual
return of 6.2%. The rate used to discount pension benefits
and other benefits was based on a yield curve developed
from market data of over approximately 600 Aa-grade
non-callable bonds at December 31, 2010. This yield
curve has discount rates that vary based on the duration of
the obligations. The estimated future cash flows for the
pension and other benefit obligations were matched to the
corresponding rates on the yield curve to derive a
weighted average discount rate.
The difference between actual and expected return on
plan assets is included in unrecognized gain (loss), and is
considered in the determination of future net periodic
benefit income (cost). The actual return on plan assets for
2009 was lower than the expected return due to the
significant decline in equity market values that occurred
in 2009. The actual return on plan assets in 2010 was in
line with the expectations.
INVESTMENT POLICIES AND STRATEGIES
The financial position of PG&E Corporation’s and the
Utility’s funded employee benefit plans is driven by the
relationship between plan assets and liabilities. As noted
above, the funded status is the difference between the fair
value of plan assets and projected benefit obligations.
Volatility in funded status occurs when asset values
change differently from liability values and can result in
fluctuations in costs for financial reporting as well as the
amount of minimum contributions required under the
Employee Retirement Income Security Act of 1974, as
amended (“ERISA”). PG&E Corporation’s and the
Utility’s investment policies and strategies are designed to
increase the ratio of trust assets to plan liabilities at an
acceptable level of funded status volatility.
Interest rate risk and equity risk are the key
determinants of PG&E Corporation’s and the Utility’s
funded status volatility. In addition to affecting the trust’s
fixed income portfolio market values, interest rate
changes also influence liability valuations as discount
rates move with current bond yields. To manage this risk,
PG&E Corporation’s and the Utility’s trusts hold
significant allocations to fixed income investments that
include U.S. government securities, corporate securities,
interest rate swaps, and other fixed income securities.
Although they contribute to funded status volatility,
equity investments are held to reduce long-term funding
costs due to their higher expected return. The equity
investment allocation is implemented through diversified
U.S., non-U.S., and global portfolios that include
common stock and commingled funds across multiple
industry sectors. Absolute return investments include
hedge fund portfolios that diversify the plan’s holdings in
equity and fixed income investments by exhibiting
returns with low correlation to the direction of these
markets. Over the last three years, target allocations to
equity investments have generally declined in favor of
longer-maturity fixed income investments as a means of
dampening future funded status volatility.
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